In Barclays Capital Inc. v. TheFlyOnTheWall.com, 06 Civ. 4908 (S.D.N.Y. March 18, 2010), Judge Denise Cote issued a narrowly tailored injunction against republication of financial services firms stock recommendations.
FlyOnTheWall.com (Fly) collected and published summaries of stock analyst reports within minutes after they were released by financial institutions to their clients. FlyOnTheWall sometimes included summaries of the research reports, but following commencement of the suit it only published headlines such as "EQIX: Equinox initiated with a Buy at BofA/Merrill." Three financial institutions filed suit against Fly for hot news misappropriation and copyright infringement.
After denying the parties' cross motions for summary judgment, Judge Cote held a bench trial. She made extensive findings regarding the business models of the financial institutions, including how each one devotes substantial efforts to developing original research and provides its research to clients at no charge in the hope the client will place trades with the firm based on the recommendations. She described how each institution conducts a morning call at roughly 7:15 am, and the substantial efforts by the institutions to reach their clients beginning at 8 am and continuing to mid-day and sometimes over two days. She also made findings about the firms' efforts to restrict access to the research, to control press coverage for 4 hours or until 2 pm, and their surveillance programs. The court also credited evidence that the unauthorized redistribution of recommendations was a major contributor to the decline in the resources each firm devotes to equity research.
With regard to copyright, Judge Cote was persuaded by seventeen examples of verbatim copying from the research reports. Plaintiffs elected the minimum statutory damages award, so the court entered judgment in the amount of $6,750 for Barclays and $6,000 for Morgan Stanley, plus prejudgment interest from the date of publication to entry of judgment. The court also awarded attorney's fees for the copyright portion of the case, which could be reduced following a hearing on Fly's financial condition.
With regard to hot news misappropriation, Judge Cote reviewed the development of case law regarding hot news, with emphasis on Supreme Court and Second Circuit decisions. She then found that the plaintiff's satisfied the five element test set forth by the Second Circuit in National Basketball Association v. Motorola Inc., 105 F.3d 841 (2d Cir. 1997):
- The cost of generating information was undisputed.
- On timeliness, the court found the recommendations were clearly time sensitive, and noted the Second Circuit's holding in FII that the tort encompasses only those situations where the defendant published time sensitive information "before [the plaintiff] has been able to utilize his competitive edge."
- As for free-riding, the court found the accused acts were Fly's "core business" and discounted publication of the news by others.
- Regarding competition, the court noted that the firms and Fly were in direct competition regarding disseminating recommendations to investors for their use in making investment decisions, and that Fly's use was undertaken "with the obvious intent, if not the effect, of fulfilling the demand for the original work." In particular, she noted that some investors will place trades based solely on the buy, sell or hold recommendation, without reading an entire research report. Judge Cote also noted that the firms and Fly used similar and sometimes identical channels of distribution and that Fly took steps to compete even more directly by aligning itself with discount brokerages.
- Lastly, the court found that Fly's conduct would be likely to substantially threaten the firms' ability to continue to participate in the market for monetizing their research.
The court next discussed the scope and temporal length of injunctive relief, noting that under International News Service v. Associated Press, 248 U.S. 215 (1918) the lead time for exploitation of the news was the period "until its commercial value as news to the complainant and all of its members had passed away." Judge Cote declined the firms' request for four hours or until 12:00 noon, whichever is later, instead issuing a more limited injunction as follows:
- For recommendations released prior to the market opening, Fly was enjoined for 1.5 hours or until 10:00 a.m., whichever is later.
- For recommendations released while the market is open, the injunction is for two hours after the release.
In addition to the temporal limitations, there are two additional provisions of interest: First, the court provided an exception for factual analysis by Fly of market movements that refers on occasion after the market opens to a firm's recommendation in the context of independent analytical reporting on a significant market movement that has already occurred that same day. Second, Judge Cote scheduled a one year reevaluation of the scope of the injunction for Fly to seek relief in the event the firms have not taken reasonable steps to restrain the systematic, unauthorized misappropriation of the recommendations by third parties.